Tax Guru-Ker$tetter Letter

Monday, December 04, 2006

ACAT's Year End Tax Tips

I just received an email from ACAT with an attached doc file of tax tips to be shared with clients and local media outlets. Since this blog is my local media outlet, I am sharing those tips here.

The Twelve Tips of Business Year-End Tax Planning

Before business owners celebrate the Twelve Days of Christmas, they should first take a moment to review these Twelve Tips of Business Year-End Tax Planning. These could save the average business thousands of dollars!

It’s important to act quickly – once the bell tolls for the New Year, these opportunities for potential savings will be gone!

1. Accelerate deductions from 2007 into 2006. A business can do this by making payments this year for expenses such as office supplies, repairs, maintenance, and advertising.

2. Consider setting up a qualified retirement plan. It is one of the best ways for businesses to save on taxes. There are many options, so picking the right plan for your business is the key. Some plans are required to be set up by year end.

3. Reduce or defer year-end income. For cash basis businesses, deferring billing for services until the end of December or January can shift the income into the next year, as the income is reported in the year it is actually received. Also, delaying shipping of merchandise until January moves income into the next year.

4. Accelerate purchase of equipment. If you anticipate business income to be higher in the current year versus next year, it makes sense to accelerate the purchase of equipment and other assets into this year. The benefits of Section 179 depreciation can mean large tax deductions, thus making the tax savings significant. Businesses can elect to “expense” part or all of qualified assets purchased during the year, up to the annual limit of $108,000 for 2006. There is a limit based on taxable income and an annual purchases threshold amount to qualify.

5. Review fringe benefit plans. A Section 125 “cafeteria” plan can benefit both the employee and employer with pre-tax savings for health and dental insurance, out-of-pocket medical costs, dependent care, and other benefits.

6. Write off bad debts. Businesses that use the accrual basis method of accounting may have uncollectible past-due accounts. These businesses can deduct these bad debts when they become partially or totally worthless. These accounts should be identified before year-end and the business should keep a detailed record of the debt-collection efforts.

7. Write off old inventory. Review the business inventory for obsolete and un-sellable items. A business may write down inventory below market if in the regular course of business the company has offered the merchandise for sale at below-market prices.

8. Review building depreciation. If your business has purchased or substantially renovated a building in the last 10 years, conduct a Cost Segregation Study. The study analyzes the components of a building or renovation to gain larger depreciation deductions based on shorter depreciation lives.

9. Explore like-kind exchanges. If you are considering replacing old equipment or buildings with newer ones, take advantage of the like-kind exchange rules. Trading assets is one of the best tax shelters available to businesses and investors. The section 1031 like-kind exchange rules are very strict and must be followed exactly.

10. Review your business entity classification. Check to see if your business classification (sole proprietorship, C-corporation, S-corporation) and your accounting method options (cash basis vs. accrual basis) are the most advantageous for your business. Tax laws change constantly and reviewing the alternatives could significantly impact your taxes. Any change in ownership of the business is also a good time to review your options.

11. Finalize the budget. Compare income and expenses for the current year to the previous year and prepare a budget for the coming year. A budget will help a business reach its goals.

12. See your accountant or tax advisor. There are many ways to save tax dollars and consulting with a tax professional who is experienced and familiar with the latest tax law changes can help you minimize taxes and maximize your bottom line. Effective tax planning can make a material difference in your company’s cash flow.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice. For information on how these general principles apply to your situation, please consult an accounting or tax professional.

Heed the Top Ten Year-End Tax Tips To Save on 2006 Taxes

“If I had only known about that new tax law, I would have done something before the end of the year!” This common lament of taxpayers is often the result of simply not staying on top of the latest changes to the increasingly complex tax laws. But it doesn’t have to be that way!

Avoid surprises and maximize tax savings with these “Top Ten Year-End Tax Tips”:

1. Take stock of your stocks. Review your current year stock and mutual fund sales to determine if you have a net gain or loss. If you have a net gain, then selling stocks that would produce a net loss may make sense. A net capital loss of up to $3,000 can be deducted against other income, such as salary. Any excess losses can then be carried forward to future years.

2. Watch out for the estimated tax penalty. The IRS requires individuals to pay their taxes throughout the year with quarterly estimates, tax withholding, or both. If you don’t pay enough during the year, you can be hit with an estimated tax penalty, which is equal to the interest rate for underpayments. Although it may be too late for this year, adjusting your income tax withholding can eliminate or reduce the penalty.

3. Consider stock donations. If you want to donate to your favorite charity but are short on cash, check out your stock portfolio. If you own stocks that would produce a large capital gain, consider donating them before you sell them. You can deduct the market value of the stock as a charitable contribution and you pay no tax on the appreciation.

4. Reducing the tax on Social Security benefits. People who receive Social Security benefits can be taxed on a high percentage of their benefits. Investing in T-Bills or CDs that don’t mature until next year can lower the provisional income in the current year and lower the tax rate. Also, investing in growth stock that produces little income can have the same result.

5. “Kiddie Tax” update. The new tax law raises the age threshold for the “kiddie tax.” For 2006, any unearned income (interest, dividends, capital gain, etc.) received by a child under age 18 (previously age 14) that exceeds $1,700 is subject to federal tax at the parents’ top marginal tax rate. You might want to shift investments into growth stocks that produce little income, tax-free municipal bonds or municipal-bond funds, Series EE bonds, or CDs that mature in the next year.

6. Installment sale of property. If you are considering the sale of real estate property that was held for investment purposes, you could spread out the tax hit over several years with an installment sale. If you structure the sale into two payments, one in December and one in January, you spread the tax over two years instead of one. The second benefit may come from a lower adjusted gross income.

7. Shift timing of deductions. Consider maximizing your itemized deductions by “bunching” deductions. In order to get a tax break from itemizing deductions, you must have more in deductions than the standard deduction allowed by the IRS. For 2006, this is $10,300 on a joint return and $5,150 on a single return. If you are close to the standard deduction each year, consider accelerating all possible deductible expenses into every other year. Shift payments of medical expenses to the year they will exceed 7.5 percent of your adjusted gross income, pay two years of personal property tax and real estate tax in one year, or double up on your charitable contributions into one year.

8. Watch business expenses. If you deduct employee business expenses, your deduction is reduced by 2 percent of your adjusted gross income and you may lose the deduction totally because of the alternative minimum tax (AMT). The best strategy is to set up an “accountable plan” with your employer to cover all your business expenses in lieu of wages for the same amount. The reimbursements you receive will be tax-free, not subject to payroll taxes or alternative minimum taxes.

9. Defer income until next year. If it is possible to defer receiving income until the next year, you not only defer income tax on that income for another year but you may increase the value of your deductions for the current year if you have adjusted gross income limitations. Consider postponing bonuses, investment gains, or elective distributions from retirement accounts.

10. See your tax professional. Make an appointment with your tax professional before year end. Opportunities missed can mean cash in the bank. Don’t be one of the many taxpayers that look back and say, “If I only knew about this before the year end.”

Tax laws change every year, so it’s always a good idea to review all your options while there’s still time to take action,” explains Paul V. Thompson, EA, ABA, ATA, ECS, Senior Tax Manager for Shaw & Sullivan, P.C., Alexandria, VA. “You should also not assume that your tax withheld from your W-2 wages or the tax estimates you are paying are enough to cover your tax liability or avoid a penalty.”

Labels: 1031, 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/04/2006 07:25:00 PM Send this post: